Test

Exhibit 13)

3. Find sum of PV(ITS) for 1980-1984.

4. Find Terminal Value of ITS assuming same growth rate as FCF i.e. 8% and then PV (Terminal Value of ITS)

C. Value of Levered Firm

1. Add the two together to get Value of Levered Firm i.e. $559.21m

D. Value of Equity

1. Subtract the value of existing debt of $15.6, unfunded pension liabilities of $34.5m and add existing cash of $95.1m (source: Exhibit 7)

2. Divide by 12.2 million shares to get value per share of $49.53 (or equity value of $604.21M compared to proposed value of $463.60).

Key: We would justify the price of 38 i.e. a 50% price premium over current market price by highlighting that IF we were to go ahead with the LBO, we can expect the equity value to be higher than the price offered. Hence, we are actually underpaying for the LBO.

Things to Consider

* Our valuation is dependent on our inputs assumptions.

* Post-LBO, Congoleum will have a leverage ratio of 94% (compared to industry average of 80% and comparables used with 70-75%). In addition, it will have a leverage ratio of 89.7% as it pays down its debt from 1978 to 1984, still significantly higher than industry average & comparables. This may increase the default risk and hence, a further premium may need to be added to the comparables’ cost of debt. Alternatively, we could subtract the PV of expected financial distress cost from the valuation to obtain a more conservative estimate.

* The case states that Prudential’s loan agreement are usually for 12-20 years and so ideally, it would be better to assume that Prudential will be paying off the debt during this longer period of time, after which it will maintain a constant leverage ratio. Hence, it would be better to forecast the FCF over a longer period of time until Congoleum’s leverage reached a “steady state” in line with industry average & comparables.

* We are treating preferred shareholders as part of the “equity”. However, it may be more prudent to consider them as “debtholders”...